US Week in Review - Week ending 24 May 2012
The US Week in Review highlights this week’s developments and emerging issues in the financial reporting world and gives you direct access to relevant technical accounting guidance and thought leadership produced by Ernst & Young.
Ernst & Young publications
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards) this week discussed comment letters they received on their joint revenue recognition proposal as well as the redeliberation plan proposed by their staffs. Our To the Point publications, which include editions focusing on the media and entertainment and technology industries, summarize significant comment letter themes, discussions at recent roundtables hosted by the Boards and the Boards' proposed redeliberation plan. The Boards have targeted early 2013 for issuance of a final standard.
The number of initial public offerings (IPOs) in the US has increased over the past two years. Now the Jumpstart Our Business Startups Act (JOBS Act), which was enacted in April 2012, could encourage more IPOs by creating a new category of issuer called an emerging growth company. Being familiar with SEC staff "hot buttons" and understanding leading practices in the registration process will help a company meet its deadlines and have the flexibility to respond to market conditions.
To assist in a smooth IPO registration, our To the Point publication highlights suggestions from the SEC staff and observations from our extensive experience with companies that have successfully completed IPOs.
The FASB and the IASB continue to make significant progress to more closely align their classification and measurement models for financial instruments. Our To the Point publication highlights their latest tentative decisions.
A review of early voting results from the 2012 proxy season reveals that companies that are proactively strengthening engagement efforts and enhancing communication in the proxy statement are securing strong support amid increased investor scrutiny and targeted activism. Key developments include:
- Overall director opposition votes remain low, while exposure to targeted "vote no" campaigns increases.
- Proactive companies secure high support on say-on-pay proposals.
- Investors continue to press for greater accountability measures at the board level through shareholder proposals.
Standard Setter updates
Financial Accounting Standards Board (FASB)
FAF establishes Private Company Council
The Financial Accounting Foundation (FAF) Board of Trustees established a new Private Company Council (PCC) that will determine whether exceptions or modifications to existing US GAAP are necessary to address the needs of users of private company financial statements and will advise the FASB on private company considerations in standard setting. In response to stakeholder concerns, the FAF said it made several improvements to its October 2011 proposal. The full report will be posted on the FAF website next week.
The PCC's responsibilities and processes include:
- The PCC and the FASB will agree on criteria for determining whether and when exceptions or modifications to US GAAP are warranted for private companies. The PCC will use these criteria to set its agenda by a vote of two-thirds of its members, in consultation with the FASB and with input from stakeholders.
- The PCC will expose proposals for public comment if they are endorsed by a majority of FASB members. After redeliberations by the PCC, the FASB will make final decisions on PCC proposals, usually within 60 days. If the FASB doesn't endorse a proposal, the FASB Chairman will explain why in writing and discuss possible changes that could lead to FASB endorsement.
- The PCC will be comprised of nine to 12 members selected by the FAF. The PCC Chair will not be a FASB member, but a FASB member will be assigned as a liaison to the PCC.
- The PCC will meet to publicly deliberate at least five times in each of its first three years. All FASB members are expected to attend and participate in these meetings, but the PCC may hold closed educational and administrative sessions.
- The FAF will create a Private Company Review Committee chaired by a Trustee with experience in private company accounting issues. The PCC will provide quarterly written reports to the FAF. The FAF will assess the PCC after its first three years of operation.
21-22 and 24 May 2012 FASB-IASB joint meeting
Financial instruments: classification and measurement - See our To the Point publication above.
Financial instruments: impairment - The FASB and the IASB tentatively agreed that accounting for the impairment of lease receivables would follow an expected-loss approach. Similar to companies with trade receivables that have a significant financing component, lessors could make a policy election to either (1) fully apply the three-bucket model or (2) use a modified approach to always determine the impairment allowance by using lifetime expected credit losses. This election would apply to lease receivables under the joint leasing project that the Boards are currently deliberating, as well as lease receivables recorded under existing US GAAP.
Investment companies - The FASB and the IASB agreed to modify their proposed definitions of an investment company. Rather than requiring an entity to meet all six proposed criteria, the Boards agreed to base their definitions on some of the criteria (e.g., express purpose and nature of the investment activities). Entities would not be required to meet the other proposed criteria, but would consider them when determining whether they qualify as investment companies. However, the Boards disagreed in some cases about the required criteria and the factors to consider. For example, the FASB decided that an entity could invest solely for investment income and still meet the definition of an investment company but the IASB did not. Consolidation of controlled investments and the scope of entities that invest primarily in real estate will be discussed at future meetings.
Revenue recognition - See our To the Point publication above.
Leases - The Boards discussed the feedback they received during their recent outreach on lessee accounting. They appear to be most seriously considering two different approaches to lessee accounting. Both approaches would require leases to be recorded on the balance sheet. The first would be consistent with tentative decisions to date and would result in the front-loading of lease expense for most leases. The second would result in recognition of lease expense similar to operating leases today (i.e., straight-line expense pattern). The Boards also discussed having some leases follow the first approach and others follow the second. Board members noted they hope to decide on an approach to lessee accounting along with potential changes to lessor accounting at their June meeting.
Insurance contracts - The Boards tentatively agreed to a principle for determining when investment components should be unbundled from insurance components. Today, the Boards were scheduled to discuss how other comprehensive income could be used to present certain changes in the insurance liability and presentation and measurement of acquisition costs.
For additional details of the Boards' discussions, see the FASB's Action Alert.
Upcoming meetings and webcasts
30 May 2012 FASB meeting
The Board is scheduled to discuss its projects on Technical corrections and Investment property entities. For additional details of the planned discussions, see the FASB calendar.
See the FASB calendar for upcoming education sessions. No decisions are made at these sessions.
Securities and Exchange Commission (SEC)
SEC Advisory Committee on Small and Emerging Companies to meet
The SEC Advisory Committee on Small and Emerging Companies (the Committee) will meet on 8 June 2012 to discuss provisions of the Jumpstart Our Business Startups (JOBS) Act and other matters relating to rules and regulations affecting small and emerging companies under the federal securities laws. This will be the Committee's first meeting since the enactment of the JOBS Act, which addresses certain issues previously being considered by the Committee. The meeting will be webcast on the Commission's website.
The Committee focuses on the priorities and interests of small privately held businesses and publicly traded companies with capitalizations of $250 million or less.
Government Accounting Standards Board (GASB)
Upcoming GASB meeting
The Governmental Accounting Standards Board (GASB) is scheduled to meet 30 May - 1 June 2012 and is planning to discuss the following:
- Pension accounting and financial reporting
- Financial guarantees
- Fair value measurement and application
- Financial projections
Public Company Accounting Oversight Board (PCAOB)
PCAOB publishes 2011 annual report
The PCAOB (the Board) has published its 2011 annual report, which summarizes the activities of the Board in 2011 regarding (1) registration, (2) inspections, (3) standards and (4) enforcement. It also includes the PCAOB's audited financial statements.
In 2011, the Board focused significant attention on issues related to the global financial crisis; the need for access to non-US jurisdictions for inspections of registered firms that audit US-traded companies; the implications of that access in the Board's oversight of the global networks of affiliates maintained by the largest firms; and the ongoing evolution of regulatory, legislative and judicial developments in the US and elsewhere.
Upcoming Thought center webcasts and podcasts
The Ernst & Young Q2 2012 financial reporting update
Co-sponsored by Financial Executives International (FEI)
7 June 2012, 1:00 p.m. Eastern time